Capacity Market: Auction rule change could raise costs for consumers

Capacity Market: Auction rule change could raise costs for consumers

This week saw the government confirm plans for the UK’s next Capacity Market auction for delivery in 2022/23. The auctions are expected to take place next year, with a price cap of £75 per kilowatt per year and a price taker threshold of £25 per kilowatt per year.

The Department for Business, Energy and Industrial Strategy (BEIS) announced that for the T-4 auction, it was targeting a total volume capacity of 46.7GW. Of this, 400MW will be set aside, leaving 46.3GW to be auctioned in the T-4.

In addition to this, BEIS have added a further 4.6GW of capacity to the T-1 auction for delivery in 2019/20 to ensure generation needs can be met in the event of a surge in demand during the winter season.

Comparisons to previous auctions

The threshold lies much higher than prices at the previous capacity auction earlier this year, which cleared at a record low of £8.40 per kilowatt per year. Following recommendations from the National Grid, the latest price threshold is to take into account the UK leaving the European Union, with the UK either remaining involved in internal energy market or setting up a new future agreement with comparable arrangements.

When compared with the National Grid analysis for 2021/22 in last year’s report, the 2018 recommendation for 2022/23 is 3.8GW lower. This can be attributed to two reasons; the first being changes that affect the total de-rated capacity required and the second reason being changes that affect the split of total de-rated capacity between eligible and ineligible capacity. These partially stem from lower peak demand and increases in renewable contributions at peak times.

How will this impact you?

With an agreed threshold price from the Government, auction results will likely see an increase to costs for energy bill payers. Annual Capacity Market costs from April 2018 to March 2019 saw a price of £3.68/MWh for customers. Last auction saw the lowest Capacity Market auction prices to date, so a return to around previous amounts will be a noticeable change.

Additional effects

The price taker threshold point will seek to drive investment in back-up generation and flexible grid services. Developers of battery storage were unwilling to commit to the low prices on offer at the last auction. However, around 500MW of battery storage capacity was contracted at a previous clearing price of £22.50 per kilowatt per year suggesting that a higher price will see new contracts.

One notable change announced was that payments for providing embedded generation are set to drop from £45 per kilowatt per year to just £3.22 per kilowatt per year between 2018 and 2020.

A significant payment reduction could result in higher capacity market clearing prices which may see larger energy users explore the perks of taking advantage of the flexibility available in their energy demand. This in turn could see more Demand Side Response (DSR) participation as they look at opportunities in balancing services and wholesale markets.

Stay informed with Utilitywise

Utilitywise can help you remain informed of price increases and help you budget for any impact these auctions may have on your costs. To find out more about the Capacity Market you can contact us on 01527 511 757, by email at corporate@utilitywise.com, or visit our FAQ blog.

James Shaw

Posted by on Wednesday, the 11. July at 11.26

James Shaw joined the Market Intelligence team at Utilitywise in 2018 as a Graduate Market Intelligence and Policy Analyst. James has a master’s degree in Energy Engineering with Environmental Management from the University of East Anglia.